What is good for the economy?

I am always impressed by the way common words and phrases prevent substantive discussion of important issues. The phrase that is currently getting on my nerves is “good for the economy.”

What exactly is good for the economy? The economy is after all an abstraction, a way that we describe systems of production and distribution (among other things). How do you know what is good for an abstract system? Commentators who rely on this unfortunate phrase obviously do not mean something so absurd as “good the economy” in a literal sense. But teasing out what they do mean is not always easy.

On television news — especially local news — the state of the economy is always measured by the stock market. If the Dow went up, it was a good day for the economy, or so it is reported. But this makes very little sense. The rise and fall of the Dow is — at least theoretically — only an indicator of investor speculation on the future profitability of corporations within the Dow index. It tells us nothing really about production and distribution right now.

Even if we give some credit to those expectations as reliable indicators of what will happen, it is certainly not clear why rising profitability is “good for the economy.” It is good for investors of course since rising profitability increases dividend payments and the price they can command for their stock holdings. But for those who do not hold much stock, rising profitability means nothing at all, and could even be a bad thing.

For instance, firms can increase profits by driving down wages. The Dow would go up, but only because wages go down. Is this good for the economy? Well, that again goes back to the original question: how can something be good for an abstraction? It is good for certain people who are actors in the economy, at least in terms of their wealth increasing. But it would also be bad for other actors in the economy, namely workers.

More serious commentators seem to describe things as “good the economy” if they cause production to expand and the economy to meet its potential output. This too is a questionable way to talk. As the last 40 years in the United States demonstrates, rising productivity does not necessarily improve the lives of even the majority of the population. When the benefits of increased production almost solely flow to the super-rich, is increased production really “good for the economy?”

What this “good for the economy” discussion does is mask and prevent real discussions about production and distribution. The question is not whether something is “good for the economy,” but whom it is good for? Economic events affect populations — classes — differently.

Suppose for example that economic growth was better maximized by extreme inequality. Would that in and of itself mean that extreme inequality is “good for the economy?” Of course not. We could imagine a world with slightly less growth that is distributed far more equitably such that the overwhelming majority of people are better off than they would be in the extremely unequal maximum-growth economy. So which model then would be “good for the economy?”

That is not to say that everything needs to be couched in terms of how an action affects individuals on a class level. But at minimum, people should say what they mean. If by good for the economy, you mean something generates more economic growth or higher profits, the benefits of which could all flow to the top 1%, then say that. Don’t say “good for the economy.” The phrase has no coherent meaning, and discussions of economic policy and philosophy would be better served if it — and its converse, “bad for the economy” — was annihilated altogether.

The market is a distortion

Commentators and politicians of more conservative persuasions often criticize certain behaviors that they label as “market distortions.” Regulations, government spending, and progressive taxation are all said to distort the market because they change the economic incentives of certain behaviors. For instance, imposing fines on firms that dump poison into rivers distorts the market because if fines are high enough and properly enforced, the incentive to cheaply dispose of poison that way is destroyed. A firm then might have to undertake extra costs to dispose of the poison differently which might have various other effects on profits, wages, and prices.

Typically conservatives aim this bit of criticism at government actions like spending and regulation, but other policies that they support distort in similar fashions. Subsidies, corporate tax breaks, and individual tax deductions all have the exact same distorting influences as programs conservatives so often deride. Deductions and loopholes alone accounted for over $1 trillion in tax expenditures in 2010. Of course, these kinds of programs are typically targeted towards corporations and middle to higher-income individuals which no doubt makes their distorting influence more bearable for the conservative crowd.

As Mike Konczal points out, this kind of distortion manages to fall under the radar of most Americans, even those who actively benefit from the programs. The majority of those who receive a mortgage interest tax deduction do not realize that the deduction is nothing more than a way that the government spends through the tax code. It is functionally identical to setting up a mortgage interest welfare program in which the government sends out checks to those paying off a house. Just as that program would, the mortgage interest tax deducation distorts the housing and lending markets as well as the alignment of consumer incentives.

These sorts of programs — which are hardly if ever mentioned in the market distortion screeds of the small government advocates — make up what Suzanne Mettler refers to as the Submerged State (pdf). But instead of attacking the Submerged State for its market-distorting influences, the conservative commentators almost exclusively use the rhetoric to go after things like the minimum wage and labor unions. Recall Michelle Bachmann’s notable 2005 comment that we could wipe out unemployment if we got rid of the minimum wage, the suggestion being that the minimum wage introduces a distortion that affects the types and number of jobs that are available.

Labor unions are attacked as market distortions because their collective bargaining strength permits workers to command greater compensation than they would otherwise receive bargaining alone. This is claimed to have “job-killing” effects because so long as other locales do not permit unions to operate effectively, owners of capital looking to make as much money as possible may move to those locales where they can squeeze more profit out of the workers. (see also: What warnings about job-destroying regulations really mean)

Two things about the discussion of market distortions always baffle me. The first is that the label is used by itself to be synonymous with “bad.” Those who rely on the concept to provide policy commentary take it as a given that just calling something a “market distortion” is enough to argue that it is a bad thing. Unless you have some sort of fetish for the market, that assumption is completely off. An argument needs to be provided to explain why a specific market distortion is bad that makes a point other than simply remarking that it is one. For instance, consider the market distortion that consists of the government ban on leaded gasoline. This policy has a huge impact on public health, in particular the development of children, precisely because it distorts the market. To claim then that market distortions are an evil in and of themselves is totally foolish.

The second problem with the rhetorical device is that it relies upon the assumption that there is such a thing as a market without distortions. The fact of the matter is that the market is itself a distortion. Distortionary government policies are necessary to generate markets in the first place — granted these policy distortions are so entrenched that people do not even think of them as such.

For instance, consider certain aspects of the legal system in the United States. In that system, there exists laws which forbid individuals from taking over a house or building that someone else has a government-issued titled over. In addition to the law, the state has imposed taxes in order to hire police to enforce these laws — with violence if necessary — through the arresting of those who do not comply. A prison system is also built up in order to impose severe punishments to skew the personal incentives away from performing such an action. All of these policies are distortions. They affect the economic incentives surrounding the non-consensual seizure of property that someone has a title to.

Without those distortions, a great many people — for instance the homeless and very poor — might very well decide to simply take from others. But with the laws, police, and prisons set up, an enormous disincentive is imposed for that kind of behavior, distorting the decisions that they then make. But this kind of property protection is a baseline necessity for the existence of any market to begin with. I am doubtful you would find any conservative commentator arguing that the government distortions that create the market itself are wrongful despite the fact that they use the term in such an all-encompassing, pejorative way.

As I have mentioned previously, this whole enterprise of trying to describe behavior by appealing to specific baselines — in this case the market — is wrongheaded. We should not be asking ourselves whether something is a market distortion or not, especially since the market itself is a distortion. Instead, we should be asking ourselves who is owed what and why? From the answer to that question, we can decide whether a distortion is good or bad by determining whether it ensures that individuals are given what they are due. Treating distortions as categorically good or bad is simply untenable in any given ideology — especially the laissez-faire one — and also has the unfortunate additional quality of making absolutely no sense.

What warnings about job-destroying regulations really mean

One of the favored rhetorical approaches of groups which represent business interests is to remark that businesses create jobs. This is often coupled with the claim that laws which prevent certain business practices — paying unlivable wages, polluting the environment, creating unsafe work conditions — destroy jobs, or make it harder for businesses to create them. In service of this rhetoric, the Chamber of Commerce building in Washington D.C. has a banner on the outside of it reading “Jobs: Brought to you by the free market system.”

This particular line of rhetoric is of course over-simplistic and misguided, but also kind of amusing. To suggest that a particular economic system or agent in an economic system is the creator of jobs ignores the fact that there are diverse ways to carry out economic production. I would imagine a Chamber of Commerce building in the 1850s displaying a banner that read “Jobs: Brought to you by the chattel slavery system.” In Middle Ages England, a similar organization might erect a sign with the slogan “Jobs: Brought to you by the feudal system.” Additionally, slave masters and feudal lords would be triumphed as job creators, and policies which made it difficult for them to use slaves and serfs would be depicted as job-destroying.

Despite what the banner says, jobs are not brought to you by the free market system. After all, the existence of jobs long preceded the existence of the free market system. If you were to dig deep into the conservative rhetoric on job creation, what you would really find it saying is this: In the capitalist system, private owners of capital must be willing to participate in production for it to occur at all.

What is meant by the claim that businesses create jobs is that capital — which is what business owners have — is necessary for production to take place. Without it, those bringing their labor to exchange in the market will have no place to sell it, and will thus be without a job. The argument that the use of capital is necessary for capitalist production is true by definition. The point is not compelling, and does nothing but describe the mechanics of capitalist modes of production.

So what then is the point being made when business groups say that a particular action is job-destroying? In many cases, that line is used in ways that are so disingenuous as to be laughable. For example, business lobbyists claimed that totally voluntary suggestions that companies not advertise unhealthy food to kids were “job-killing government outreach.”

In other cases, what business groups mean when they say some particular requirement is job-killing is that owners of capital are not willing to make productive use of it if the requirement is put in place. So when they say that a regulation which forbids a local plant from poisoning drinking water will kill jobs, what they mean is that owners of capital are unwilling to use their capital if they are not permitted to poison the drinking water. If they cannot cut costs by dumping their waste into the local water supply, the productive enterprise is not appealing enough for them to carry out. Instead, they might do something else with their capital like buy treasuries or take it overseas to places where they are allowed to pollute drinking water.

In essence then, this whole rhetoric about policies hindering job creation is really nothing more than a threat. Owners of capital are threatening to basically carry out a sort of “capital strike” if the policy is put into place. In the same way that laborers can shut down production by withdrawing their labor, capitalists can shut down production by withdrawing their capital. Claiming that some requirement will kill jobs then is nothing but a way of signaling — often bluffing — that business owners will refuse to employ their capital under those requirements.

What is important to note then is that it is not safety or environmental regulations that kill jobs; it is the reaction of business owners to those regulations which do so. Despite some evidence to the contrary, owners of capital are actually human beings with agency. They do not have to make the choice to withdraw their capital to avoid conducting their businesses in moral ways. That is a decision that they make.

If a business owner closes up shop to avoid requirements that she behave ethically, any reasonable person should blame her for being an awful human being. But instead, this clever rhetoric about policies destroying jobs has effectively masked what is really going on, and caused people to forget that the actual agent of job destruction is not the person who imposes the minimally humane regulations, but the person who refuses to comply with them.